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Health Care Benefits Changes on the Horizon

Employee costs continue to rise at double the rate of inflation, study finds

#Stephen Miller, CEBS

By Stephen Miller, CEBSMar 13, 2012

Page Content

Although the rate of health care cost increases in the U.S. is expected to remain stable in 2012, U.S. employers are taking more aggressive steps to manage their rising costs and improve employee health, according to the 2012 Employer Survey on Purchasing value in Health Care by consultancy Towers Watson and the not-for-profit National Business Group on Health.

The 17th annual survey, completed by U.S. employers with at least 1,000 employees in December 2011 and January 2012, found that:

• Total health care costs per employeeare expected to rise 5.9 percent in 2012 to $11,664, up from a 5.4 percent increase in 2011 when the average per employee cost was $10,982.

• Employees’ share of costs increased 9.3 percent from 2011 to 2012, to $2,764. This represents a 40 percent increase in employee costs from just five years earlier vs. a 34 percent increase for employers over the same period.

• Early retirees face an even greater affordability challenge,as they pay a considerably larger share of coverage costs than active employees. For 2012, retirees not yet eligible for Medicare can expect to pay an average of $4,226 per year for single-only coverage and $10,500 for family coverage.

Health Benefit Design Changes

Many employers plan to make substantial changes to their health care benefit offerings over the next several years, which include placing a top strategy focus on:

• Developing a workforce culture where employees are accountable for their health (cited by 40 percent of employers).

• Reviewing their mix of benefits(25 percent of employers).

• Staying up to date and complying with the Patient Protection and Affordable Care Act (34 percent of employers).

"Employers are trying to maintain a balance between containing costs and offering competitive total rewards packages," which isn't always simple, said Ron Fontanetta, senior health care consulting leader at Towers Watson. He pointed to a wide spectrum of design choices that can help employers to develop a health care strategy that matches their objectives and workforce demographics.

Curtailing Coverage

These options include offering an employer-sponsored plan to only a portion of the population and providing employees with a financial contribution to purchase individual policies in the state exchanges scheduled to become available starting in 2014. According to the survey, only 3 percent of employers are somewhat to very likely to discontinue health care plans for active employees in 2014 or 2015 without providing a financial subsidy. However, 45 percent are somewhat to very likely to offer coverage to only a portion of their workforce and to direct the others to the exchanges.

While most employers will remain focused on sponsoring the design and delivery of their health care programs through 2015 (77 percent), they are much less confident that health care benefits will be offered at their organization over the longer term. Less than one in four (23 percent) are very confident that they will continue to offer health care benefits 10 years hence, down from a peak of 73 percent in 2007.

The opening of state insurance exchanges will have a strong impact on retiree medical offerings, as 40 percent of employers view subsidizing health care benefits for retirees of no importance to their employee value proposition today. Eight percent of employers plan to make changes to their subsidy in 2013, and 20 percent are considering changes in 2014 or 2015. While the employer sponsorship of retiree medical health care coverage will continue to erode, many employers will begin to offer an account-based alternative that will enable employees to save for their retiree medical costs. Only 10 percent of employers with retiree medical programs offer a retiree medical account, but 4 percent are planning to offer them by 2013 and 18 percent are considering them for 2014 or 2015. (To learn more, see “Retiree Health Benefits Continue Their Slow Decline.”)

Driving Employee Accountability

Employers that have been the most consistent in maintaining health care cost trends at or below the norm are encouraging employee accountability not only for the management of their health but also for the cost of the health care services they consume. These companies experienced an average annual health care cost increase of just 2.2 percent over the previous four years.

Boosting Transparency

Consistent performers were most likely to make health care benefit decisions to boost transparency by providing employees with information about health care service pricing and quality. Ultimately, the companies are looking to help employees make more informed choices by adopting decision-making support tools, as 21 percent of respondents did in 2012. (To learn more, see “Costs Vary Widely for 'Shoppable' Procedures.”)

Tightening Networks

Consistent performers are planning to take steps to improve provider quality by offering specialty treatment or narrow provider networks, and incenting the use of evidence-based care. (To learn more, see “Applying Effective In-Network Incentives at CalPERS.”)

Using Incentives—and Penalties

Companies are continuing to expand their use of financial rewards to engage employees and their spouses to manage their health better. In 2012, 68 percent of employers offered cash, premium credits and account contributions to their employees to encourage participation in healthy lifestyle activities—up from 58 percent in 2011. For the typical company that offered incentives, the maximum amount of cash employees can earn for meeting health targets is $300.

Among companies that provided incentives, 53 percent offered them to spouses and dependents in 2012, up from 46 percent in 2011 and 39 percent in 2010. The highest cash award that can be earned for meeting health targets by an employee and family combined increased by $100 over each of the last three years to $700 in 2012. (To learn more, see “Companies Increase Wellness Incentive Dollars.”)

Respondents also indicated that they had become more willing to use penalties, such as increased premiums and deductibles for those not completing required health management programs or activities. Penalties were used by 20 percent of respondents in 2012, roughly double the number of companies that used penalties in 2009.

Achievement-Based Standards

Some (10 percent) of companies had adopted achievement standards for incentive awards, and achievement standards will likely continue to grow in use as companies increasingly hold employees accountable for unhealthy life choices. Nearly all companies with an achievement-based program said they included weight goals as a requirement under the program, and three-quarters of companies included blood pressure, cholesterol and tobacco use as metrics. (To learn more, see “Finding Success with Progress-Based Health Incentives.”)

"To be truly successful at containing costs, employers need to empower their employees to make smart health care consumption decisions with financial incentives and tools that provide information on pricing and quality," said Helen Darling, president and CEO of the National Business Group on Health. Employers can reduce their claims costs and boost the productivity of their employees by using incentives to promote health improvement and behavior change, she noted.

Other Design Trends

Additional tactics that employers plan to use to control their costs include:

• Spousal and dependent coverage surcharges.Roughly half of the companies (47 percent) increased employee contributions in tiers with dependent coverage, and about a quarter (24 percent) are using spousal surcharges, with 13 percent planning to do so in 2013. (To learn more, see “Spousal Exclusions on the Rise.”)

• Growth in account-based health plans (ABHPs).Nearly one in six companies (59 percent) are offering an ABHP (more generally referred to as consumer-directed health plans, or CDHPs, which include health savings accounts and health reimbursement arrangements). Another 11 percent plan to do so by 2013. ABHP enrollment has nearly doubled in two years, from 15 percent in 2010 to 27 percent in 2012, the survey found. (To learn more, see “Study: CDH Plans Saved $9,700 per Employee over Five Years.”)

• Changing pharmacy landscape.Six in 10 companies added or expanded prior authorization programs or "step therapy,"which requires patients to start treatment with a preferred drug, usually a generic, chosen on the basis of clinical research, and to move on to brand-name or specialty drugs only if the drug at the previous step doesn’t work. In addition, 21 percent reduced pharmacy co-payments in 2011 for those using a generic with a chronic condition (with 16 percent planning to add this feature in 2013). (To learn more, see “Big Picture on Drug Benefits.”)

• Vendor management and transparency.Three in 10 companies (30 percent) consolidated their health plan vendors since 2010, and 11 percent plan to do so in 2013. (To learn more, see “Renegotiate Benefit Contracts and Cut Costs.”)​